Adjustable-rate mortgage demand increases to highest level since November 2022 as high U.S. rates hammer home buyers 

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The numbers: Home buyers are turning to adjustable-rate mortgages, or ARMs, as persistently high rates hurt their ability to buy houses.

With the 30-year U.S. mortgage rate rising to the highest levels since 2000, a dip in the rates on ARMs prompted some buyers to act, pushing up ARM applications by 15% from the previous week. 

That pushed up the overall market composite index — a measure of mortgage application volume — the Mortgage Bankers Association (MBA) said on Wednesday. 

The market index rose 0.6% to 179.3 for the week ending Oct. 6 from a week earlier. A year ago, the index stood at 214.3.

Key details: To be clear, home buying and refinancing demand continues to be low, as few homeowners and buyers see the current environment as ideal.

But a drop in ARM rates boosted demand slightly. The purchase index — which measures mortgage applications for the purchase of a home — rose 0.7% from last week. 

Refinancing also rose, despite higher rates. Buyers could be dipping into their home equity through cash-out refinancing. The refinance index rose 0.3%.

The average contract rate for the 30-year mortgage for homes sold for $726,200 or less was 7.67% for the week ending October 6. That’s up from 7.53% the week before, the MBA said. 

The rate for jumbo loans, or the 30-year mortgage for homes sold for over $726,200, was 7.7%, up from 7.51% the previous week. 

The average rate for a 30-year mortgage backed by the Federal Housing Administration rose to 7.4% from 7.29%. 

The 15-year rose to 6.97% from 6.86% from the previous week. 

The rate for adjustable-rate mortgages fell to 6.33% from last week’s 6.49%. The share of ARM applications rose by 15% from the previous week. ARMs now comprise 9.2% of all applications, which is the highest share in 10 months.

The big picture: The U.S. housing market continues to be held hostage by high mortgage rates. High rates discourage home buyers, as well as homeowners who are considering selling.

ARMs offer one way for buyers to find a lower rate on their loan temporarily for the initial period, until it resets to the prevailing rate. With rates at multi-decade highs, home buyers taking on ARMs are betting on the likelihood of them falling by the time their ARM resets.

What the MBA said: ”Application activity remains depressed and close to multi-decade lows, with purchase applications still almost 20% behind last year’s pace,” Joel Kan, deputy chief economist and vice president at the MBA, said in a statement. 

“Refinance applications also continue to be limited, and the average loan size has fallen to its lowest level since 2017,” he added.

Market reaction: The yield on the 10-year Treasury note
was below 4.7% in early morning trading Wednesday.

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